Why Intel has to go outside for next CEO

Commentary: Internal candidates might not have the chops

SAN FRANCISCO (MarketWatch) — Intel Corp. is probably going to have to break with its long tradition of promoting its chief executive from inside the company for the first time in its 44-year history.

The news on Monday that Intel
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Chief Executive Paul Otellini is stepping down in May represents a huge break with its past tradition of tidy succession planning. Otellini, who is 62, will be stepping down before the company’s mandatory retirement age of 65, with no heir apparent yet lined up. Read about Intel CEO stepping down in May.

“When you are looking at the airplanes at night lined up to land at SFO ... it’s completely orderly,” said Nathan Brookwood, an analyst at Insight 64. “Intel successions have been like that.” The fact that the Santa Clara company said in its press release that it would actually look at both internal and external candidates was another major break in tradition.

Intel

Paul Otellini has been with Intel nearly 40 years.

At the same time, Intel also promoted three executives, who are now being seen as potential internal successors (along with Intel’s other executive vice presidents) to Otellini: Stacy Smith, Intel’s CFO and head of corporate strategy; Renee James, head of Intel’s software business; and Brian Krzanich, COO and head of manufacturing.

But the fact that Otellini announced his retirement without a successor lined up, and that Intel said it will also look outside, indicates that the board believes it could be time for new blood.

“Those two things say that the board is really worried,” Brookwood said.

Intel is at a crucial juncture with its core market — the PC business — seeing its growth under attack from new mobile devices such as smartphones and tablets. Intel has still not made a huge dent in the smartphone market, where the dominant processors are based on designs from ARM Holdings Plc.
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“Intel’s CEO of eight years is leaving the company amidst what we see as difficult challenges for the company in the post-PC era,” wrote Gus Richard, an analyst with Piper Jaffray in a note to clients on Monday. “As the PC market has stagnated, Intel has tried to pivot to mobile and increasingly to foundry.”

Intel CEO to retire in May

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Intel said CEO Paul Otellini intends to retire in May, ending a nearly 40-year career with the chip maker.

Richard added that Intel has had limited success in mobile so far and its prices to manufacture chips for other companies are three times higher than the prices of one of the largest chip manufacturing companies, Taiwan Semiconductor Manufacturing Co. Ltd.
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Brookwood said that Intel has plenty of good candidates inside the company and the promotions are a way of signaling those being considered. But Intel may need to get someone who can shake things up and look at the company with a new, unbiased eye, someone who does not have a long tenure with the company. Otellini, for example, has been with Intel for nearly 40 years. It’s not clear whether the board is willing to look outside the semiconductor industry or even outside of technology.

One of the rare successful examples of an outsider coming into a technology company was when Louis Gerstner, the former head of RJR Nabisco, was named as CEO of IBM Corp.
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He also had a background as a McKinsey consultant and led a successful refocus at IBM, which has now gone back to promoting its CEOs from within.

“I’m not sure they need to get that dramatic,” Brookwood said. “But you know clearly the industry is changing. So they need someone who understands or can get their arms around that industry change and refocus Intel’s efforts on areas where they are going to benefit from that change.”

Some of the signs are pointing to a possible outsider, but it’s still too early to tell. Some on Wall Street are also betting in that direction.

“Our bet is that Intel goes outside for its new CEO,” said Hans Mosesmann, an analyst with Raymond James, in a note to clients, adding that the search will “not be trivial.”

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